-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CLA5uotwtqef+UXrcSclPMvvJs55VXv5R2oUjY5m5uvPmHDhkiWgE5FXC3j/Fx2P vwWtGzzjPbGqlxewx7NJNA== 0000020232-98-000002.txt : 19980317 0000020232-98-000002.hdr.sgml : 19980317 ACCESSION NUMBER: 0000020232-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHYRON CORP CENTRAL INDEX KEY: 0000020232 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 112117385 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05110 FILM NUMBER: 98566390 BUSINESS ADDRESS: STREET 1: 5 HUB DR CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5168452000 MAIL ADDRESS: STREET 1: 5 HUB DRIVE CITY: MELVILLE STATE: NY ZIP: 11747 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER EXCHANGE INC DATE OF NAME CHANGE: 19760114 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission File Number 1-9014 CHYRON CORPORATION (Exact name of registrant as specified in its charger) New York (State or other jurisdiction of incorporation or organization) 11-2117385 (I.R.S. Employer Identification No.) 5 Hub Drive, Melville, New York (Address of principal executive offices) 11747 (Zip Code) Registrant's telephone number, including area code (516) 845-2000 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 (Title of Class) New York Stock Exchange (Name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of voting stock held by non-affiliates of the Company on March 6, 1998 was $48,530,746. The number of shares outstanding of the issuer's common stock, par value $.01 per share, on March 6, 1998 was 32,605,706. DOCUMENTS INCORPORATED BY REFERENCE Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and Related Transactions) will be incorporated into the Company's Proxy Statement to be filed within 120 days of December 31, 1997 and are incorporated herein by reference. Exhibit index is located on page 53 This document consists of 66 pages PART I ITEM 1. BUSINESS General Information Regarding the Company Chyron Corporation ("Chyron") was incorporated under the laws of the State of New York on April 8, 1966 under the name The Computer Exchange, Inc., which was changed to the present name on November 28, 1975. On April 12, 1996, Chyron acquired Pro-Bel Limited ("Pro-Bel"). On March 31, 1997, Chyron acquired Axis Holdings Incorporated ("Axis", collectively with Chyron and Pro-Bel, the "Company"). The Company's principal executive offices are located at 5 Hub Drive, Melville, New York 11747 and its telephone number is (516) 845-2000. Its executive offices in the United Kingdom are located at Danehill, Lower Early, Reading, Berks RG6 4PB and its telephone number is 44-1734-86-61-21. The Company develops, manufactures, markets and supports a broad range of equipment, software and systems that facilitate the production and enhance the presentation of live and pre-recorded video, audio and other data. The Company's products enable users to (i) create and manipulate text, logos and other graphic images using special effects such as 3D transforming, compositing and painting; (ii) manage, monitor and distribute video, audio and other data signals; and (iii) control edit processes and automate broadcast equipment. The worldwide market for equipment, software and systems used in the production and presentation of video and audio content encompasses major television networks, cable television broadcasters, direct to home satellite program distributors, production companies and post-production houses, as well as organizations and individuals creating materials such as corporate and specialized video and audio presentations. Industry Transition to High Definition Television In October 1996, the Federal Communications Commission ("FCC") adopted a rule that requires broadcasters to utilize digital advanced television transmission. This ruling requires broadcasters to adopt one of eighteen formats deemed acceptable as broadcast standards for digital television, ("DTV") as opposed to the current analog equipment, and, sets a timetable for the adoption of DTV, specifically High Definition Television ("HDTV"), broadcast by the year 2006. These decisions have set in motion the evaluation of which digital transmission formats are acceptable and will be used for replacing the current analog National Television Standards Committee ("NTSC") standards for broadcasting, news, entertainment and other program sources. Today, broadcasters are examining the performance of each of these formats, as well as their technical requirements. By the year 2006, all the current analog NTSC equipment will have to be upgraded or replaced in order to comply with the recent FCC ruling. The method and timing of broadcasters conversion to digital television is very important to the future profitability of Chyron. As an equipment manufacturer, Chyron plans to provide broadcasters with innovative DTV and HDTV equipment. Management views this industry transition as potentially a great opportunity. However, broadcasters' failure to convert on a timely basis would have a negative impact on the Company. Products The Company offers a broad range of products that address the needs of the video and audio production, post-production and distribution markets. The Company's line of high performance graphics systems are used by many of the world's leading broadcast stations to display news flashes, election results, sports scores, stock market quotations, programming notes and weather information. The Company's signal management systems interconnect video, audio and data signals to and from equipment within a studio's control room or edit suite, as well as to and from signal transmission sites. The Company's line of control and automation systems are used to automate the steps used in the management, editing and distribution of video and audio content. Graphic Systems Graphics and character generators. Chyron's family of iNFiNiT! products use a digital computer and electronic storage to permit operators to create images capable of being broadcast either independently or superimposed on other images. Images broadcast directly from the system have included election results, stock market quotations, sports scores, commercial advertising and promotional material. Superimposed images are similarly used for a variety of purposes such as identifying speakers during interviews or displaying statistics during sports telecasts. The flagship iNFiNiT! is a dual-user graphics workstation with one to three output channels, each with a dedicated key signal. MAX!> is a signal-user graphics system with one or two separate video and key channels. MAXINE! is a single channel/single-user character generator. MAX!> and MAXINE! have similar feature sets and effective resolution to the iNFiNiT!. In September 1996, the Company introduced WiNFiNiT!, an optional PC-based graphical user interface which utilizes the Microsoft Windows NT operating system. Still store management systems. IMAGESTOR! offers real-time playback of uncompressed video frames and instant access to thousands of one-line or archived images. Live newscasters and broadcast trucks use IMAGESTOR! for live video capture as well as for image storage retrieval for on-air display. The IMAGESTOR! system allows on-line storage of 2,000 still images with optional additional storage available. The library of stills can be searched and sorted by criteria, keywords and other attributes. Users can create a playlist of images for automatic playback during live on-air operations and embed the selected still images with effects such as cut, dissolve, wipe, push, reveal and hide. IMAGESTOR! is available as a stand-alone workstation or a database file management software program for use with Chyron's iNFiNiT! family of graphics systems. Compact graphics and character generators. The Company's compact character generators, sold under the CODI and PC-CODI names, provide real-time text, titling and logo generation which are used for broadcasting time, temperature, weather warnings, sports statistics, scoreboards, news updates and financial information. CODI products may operate through touch screens for real-time on- screen drawing. They can work with standard computer platforms regardless of operating system or system performance. Electronic paint and animation systems and software. Chyron's Liberty family of paint and animation tools are resolution- independent, non-linear, digital image processing systems and software. Liberty products are used to create, edit and composite special visual effects in an on-line, real-time environment. Liberty products have been used for high-end film applications and have created special effects for major feature films, including Casino, Broken Arrow, and Godzilla. Liberty products operate on various Silicon Graphics workstations and support all popular file formats. Liberty offers a menu of video graphic creation tools, such as painting, compositing, morphing, titling, 3D transforming, layering, coloring, cycle animation, rotoscoping and cell animation. Signal Management Systems Switching and routing systems. Under the Pro-Bel name, the Company provides a complete range of control solutions for matrix systems which process and distribute multimedia signals. The PROCION product offers a range of IBM PC/Windows touch screen control systems which are easy to use and configure. System 3 provides a push button control panel which can utilize simple signal matrix solutions and multi-matrix installations with integrated tie-line management. System 3 and PROCION can co-exist for maximum flexibility. The new XD series of digital router switchers are large-scale routing systems that can produce high-performance signal distribution across a wide spectrum of applications. The TM Series are compact digital routing switchers that provide a cost-effective solution for users moving from analog to digital distribution and for smaller scale routing solutions such as remote broadcast vehicles. The HD series of routing switchers includes matrix products for digital and analog video, digital and analog audio and RS422 machine control. Intercom/talkback. The Trilogy Commander 400 Series combines Digital Signal Processing ("DSP") audio techniques with control technology to produce a digital intercom/talkback system. The system is supplied with IBM compatible PC-based editing and control panels to manage audio crosspoints. Intercom systems are implemented in a wide range of applications including television and radio broadcast facilities, airports, hospitals, outside and remote broadcast trucks, post-production suites and leisure complexes. Control and Automation Systems Master control, storage and station automation. Pro-Bel has developed a suite of products which are designed to process video, audio and related data signals, automate playout of the signals and manage media signal storage devices in the master control and transmission suites. MAPP is a Windows-based, video server management and control system. MAPP provides facilities to record, track, cache and replay broadcast material according to a user defined schedule. MAPP easily interfaces with disk based video servers manufactured by many different vendors. The COMPASS station automation system provides comprehensive station automation capability to major broadcasters that have complex playlists. Video tape cartridge machines, video servers and other devices are typically interfaced by high speed data links which allow the system to control the devices according to a playlist schedule. The automation system monitors all functions to check for discrepancies such as time errors, machines not available for control or manual intervention. The Company's digital master control switcher TX-220 employs component digital and AES/EBU digital audio signal processing. Features include 10 bit component digital video/audio processing with an analog option, up to 4 AES/EBU levels, stand-alone operation with an upstream keyer, multifunction plasma display, simple user friendly manual control and full integration with the compass Automation System. The master control switcher switches and combines video and audio content signals from various devices, such as video tape machines, disk based video servers, character generators and still storage systems, to produce seamless program flow for distribution to the final program delivery channel. Electronic editing control systems. The CMX OMNI family of edit controllers are designed to control and operate edit suite equipment. CMX OMNI systems are flexible, configurable and easy to operate. They are capable of controlling over 200 types of edit suite devices developed by other manufacturers, including video tape recorders, video disks, production control switchers, digital video effects equipment, time base correctors and audio equipment. Marketing and Sales The Company markets its products and systems to traditional broadcast, production and post-production facilities, government agencies, educational institutions and telecommunications and corporate customers. In order to maintain and increase awareness of its products, the Company displays its products at the major domestic and international trade shows of the broadcast and computer graphics industries. In the United States, the Company exhibits at the National Association of Broadcasters (NAB) and ACM SIGGRAPH conventions. It also exhibits at the International Broadcasters Conventions (IBC) in Europe, INTERBEE in Japan and Broadcast-Asia in China. The Company uses direct-mail campaigns and places advertisements in broadcast, post-production and computer industry publications. Sales of the Company's products in the United States and the United Kingdom are made through Company direct sales personnel, dealers, independent representatives, systems integrators and OEMs. Direct sales, marketing and product specialists serving the domestic markets act as links between the customer and the Company's development teams. Sales of the Company's products outside of the United States and United Kingdom are made through dealers and several representatives covering specific territories. The Company maintains a sales office in Hong Kong and is currently establishing a sales office in Paris, France in an effort to increase foreign sales. In some territories, dealers sell products from all of the Company's product categories; in other territories, dealers handle only specific products. Service, Support and Training The Company offers comprehensive technical service, support and training to its customers through 24 hour per day, seven days per week access to trained service and support professionals. Training courses are available through the Company and range in length from a few days to a few weeks and consist of a mix of classroom discussions and hands-on training. The Company offers training courses for many of its products at its Melville (New York) headquarters and its Reading (United Kingdom) and Atlanta (Georgia) centers. The Company also conducts on-site training. Installation assistance, hardware and software, maintenance contracts and spare parts are made available by the Company. Support contracts and a responsive spare parts supply service facilitate customer satisfaction. Service is provided both domestically and internationally by the Company or its appointed dealers and representatives. The Company also provides sales and service support to its dealers from time to time. The Company provides warranties on all of its products ranging from 90 days to five years. Research and Development The Company's research and product development, conducted in Melville, New York, Reading, United Kingdom and Cupertino and Torrance, California, is focused on the continued enhancement of its existing products and the development of new ones. Product development efforts include both graphic products and end routers and switches which will comply with the FCC rulings of October 1996. This ruling will affect the broadcast industry across the next decade and beyond, specifically the adoption of digital television, and more specifically HDTV television. Historically, the Company has focused its efforts toward the development of complete systems rather than of either hardware or software standing alone. A strategic engineering group evaluates hardware and software technologies. Currently engineering efforts include software stand alone products and hardware with software products that address the FCC rulings described above. On March 31, 1997, the Company acquired Axis for the primary purpose of acquiring software technology owned by Axis. As a result of this acquisition, the Company plans to start shipping Concerto, a compositing software, in 1998. During 1997, 1996 and 1995, the Company expensed approximately $6.8 million, $5.3 million and $4.1 million, respectively, for research and development. Such amounts were net of amounts capitalized and amortized with respect to software development costs incurred in connection with the development of new products and the modification and enhancement of the then existing products. Manufacturing The Company has final assembly and system integration operations located in Melville and Reading. The Company primarily uses third- party vendors to manufacture and supply all of the hardware components and sub-assemblies utilized in the Company's graphics systems and relies upon a combination of third-party vendors and internal manufacturing for components and sub-assemblies utilized in the Company's signal management systems. The Company designs many of its system components to its own specifications, including metal and electronic parts and components, circuit boards and certain subassemblies. It assembles such items and standard parts, together with internally-developed software, to create final products. The Company then performs testing and quality inspections of each product. Competition The market for graphics imaging, editing and animation systems, signal routing systems and media storage systems is highly competitive and is characterized by rapid technological change and evolving industry standards. Rapid obsolescence of products, frequent development of new products and significant price erosion are all features of the industry in which the Company operates. The FCC's recent ruling requiring broadcasters to utilize DTV transmission beginning in 1998 will require large future capital expenditures by the broadcast industry. Management recognizes this as an opportunity for the Company in the market place, but also as a result, the Company anticipates increased competition from both existing companies and new market entrants. The Company is currently aware of several major and a number of smaller competitors. In the graphics area, the Company believes its primary competitors are Aston Electronic Designs Limited, Digital Graphix Inc., Dynatech Corporation, Quantel Inc. and Scitex Corporation Ltd. In the signal management area, the Company believes its primary competitors are Dynatech Corporation, Leitch Incorporated, Philips Electronics N.V., Sony Corporation and Tektronix Inc. In the control and automation area, the Company believes its primary competitors are Accom, Inc., Louth Automation, Philips Electronics N.V., Sony Corporation and Tektronix, Inc. Many of these companies have significantly greater financial, technical, manufacturing and marketing resources than the Company. In addition, certain product categories and market segments, on a region-by-region basis, in which the Company does or may compete, are dominated by certain vendors. Backlog The Company's backlog of orders at December 31, 1997 approximated $6.7 million. The Company believes these orders to be firm and expects to fulfill the entire amount of this backlog in 1998. Employees As of December 31, 1997, the Company employed 459 persons on a full-time basis, including 74 in sales and marketing, 160 in manufacturing and testing, 36 in customer support, service and training, 70 in finance and administration and 112 in research and development. None of these employees is represented by a labor union. Patents and Proprietary Rights The Company's success depends upon its ability to protect its proprietary software technology and operate without infringing the rights of others. It relies on a combination of patent, trademark and trade secret laws to establish and protect its proprietary rights in its technology. The Company currently has seven patents. The names Chyron, Scribe, Chyron Scribe, Chyron Scribe Junior, Chyron SuperScribe, iNFiNiT!, MAX!>, MAXINE!, CODI, I2, Chyron Care, Intelligent Interface, Intelligent Interface (I2), CMX, CMX AEGIS, CMX OMNI, Aurora, Liberty, and Liberty Aurora and Design are registered trademarks of the Company. The Company also has rights in trademarks and service marks which are not federally registered. The Company does not have registered copyrights on any of its intellectual property. The duration of patents in the United States is 20 years from priority or 17 years from issuance. As a result, the Company's existing patents will begin to expire commencing in the year 1998. Government Regulations The United States Federal Communications Commission has issued regulations relating to shielding requirements for electromagnetic interface in electronic equipment. The Company's products are in compliance with these regulations. The Year 2000 The Company has taken actions to make its systems, products and infrastructure Year 2000 compliant. The Company is also beginning to inquire as to the status of its key suppliers and vendors with respect to the Year 2000. The Company believes it is taking the necessary steps to resolve Year 2000 issues; however, there can be no assurance that a failure to resolve any such issue would not have a material adverse effect on the Company. Management believes, based on available information, that it will be able to manage its total Year 2000 transition without any material adverse effect on its business operations, products or financial prospects. ITEM 2. FACILITIES The executive offices and principal office of the Company and its graphics business are located in Melville, New York pursuant to a lease that expires on June 30, 2004. This facility consists of approximately 47,000 square feet and is used for manufacturing, research and development, marketing and the executive offices. The Company also leases approximately 7,000 square feet in Cupertino, California and 4,300 square feet in Torrance, California for research and development, which expire on December 31, 2002 and November 30, 2000, respectively. The Company also maintains sales offices in Atlanta and Dunwoody, Georgia of 1,000 and 2,700 square feet, respectively, and in Hong Kong of 2,000 square feet which expire on January 31, 2001, November 30, 2002 and April 26, 2001, respectively. In the United Kingdom, the Company's executive office is located in Reading, United Kingdom where it owns an approximately 19,000 square foot facility. This facility is used for manufacturing, research and development and marketing. The Company occupies additional facilities in the United Kingdom in Reading and Andover, used primarily for research and development and manufacturing, which total approximately 28,000 square feet pursuant to leases which expire from October 31, 1997 through September 24, 2020. Currently, the Company is considering expanding its Andover facility but has not made any lease commitments. The Company currently utilizes 90% to 100% of the space of all of its facilities. Management currently believes that, other than the Andover facility, each facility is suitable for its existing operations and does not foresee the need for any significant expansion of its current facilities. ITEM 3. LITIGATION The Company from time to time is involved in routine legal matters incidental to its business. In the opinion of management, the ultimate resolution of such matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDERS MATTERS Principal Market Chyron's common stock is traded on the New York Stock Exchange ("NYSE") under the ticker symbol "CHY". The approximate number of holders of record of the Company's common stock at December 31, 1997 was 5,784. The following table sets forth the high and low reported sales price for the common stock adjusted to reflect the one-for-three reverse stock split which occurred in February 1997. Price Range of Common Stock High Low Year Ended December 31, 1997 Fourth Quarter $6.125 $4.125 Third Quarter 5.500 4.063 Second Quarter 5.875 3.750 First Quarter 9.375 4.875 Year Ended December 31, 1996 Fourth Quarter $15.375 $7.50 Third Quarter 19.875 12.00 Second Quarter 18.750 9.375 First Quarter 10.125 6.375 On March 6, 1998, the closing price of the Company's common stock as reported on the NYSE was $3.625. The Company has not declared or paid any cash dividend since November 27, 1989. The Company currently plans to retain its future earnings, if any, for use in the operation and expansion of its business and does not anticipate paying cash dividends on the common stock in the foreseeable future. During the term of its loan agreement with Fleet Bank (formerly NatWest Bank), the Company is prohibited from paying dividends in excess of 25% of its net income for the then current fiscal year. ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share amounts) Year Ended December 31, 1997 1996(1) 1995 1994 1993 Statement of Operations Data: Net sales $86,774 $82,608 $53,971 $42,762 $37,391 Cost of products sold 46,944 39,941 22,746 18,912 16,816 Gross profit 39,830 42,667 31,225 23,850 20,575 Operating expenses: Selling, general and administrative 29,662 22,349 17,066 14,301 13,452 Research and development 6,822 5,253 4,105 4,163 3,573 Non-recurring charges 3,082 Management fee 2,911 1,139 800 West Coast restructuring charge (recapture) (1,339) 12,716 Total operating expenses 39,566 27,602 22,743 32,319 17,825 Operating income (loss) 264 15,065 8,482 (8,469) 2,750 Interest and other expense, net 1,242 1,666 536 525 714 (Loss) income before provision for income taxes (978) 13,399 7,946 (8,994) 2,036 Income tax/equivalent(benefit) provision (218) 4,745 470 760 Net (loss) income $(760) $8,654 $7,476 $(8,994) $1,276 Net (loss) income per common share-basic(2)(3) $(.02) $0.27 $0.26 $(0.31) $0.05 Weighted average number of common shares outstanding(2)(3) 32,538 31,825 29,379 28,962 25,295 Net (loss) income per common share - diluted (2)(3) $(.02) $.27 $.25 $(0.31) $.04 Weighted average number of common and common equivalent shares outstanding (2)(3) 32,538 32,327 30,382 28,962 30,231 December 31, 1997 1996(1) 1995 1994 1993 Balance Sheet Data: Cash and cash equivalents $2,968 $4,555 $5,012 $1,555 $213 Working capital 38,955 45,362 28,221 12,103 13,256 Total assets 94,080 91,403 44,332 28,644 38,516 Long-term obligations 21,959 21,226 4,911 4,829 200 Shareholders' equity 53,962 53,946 29,983 13,776 22,627 (1) Includes the operations of Pro-Bel since its acquisition by the Company on April 12, 1996. The acquisition was accounted for as a purchase. See Note 3 to the Consolidated Financial Statements. (2) Adjusted to reflect the Reverse Stock Split which was ratified by the Company's shareholders on January 24, 1997. (3) Adjusted to reflect FASB Statement No. 128, "Earnings per share". ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS From time to time including in this annual report, the Company may publish forward looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, changes in the industry, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include the following: product concentration in a mature market, dependence on the emerging digital market and the industry's transition to DTV and HDTV, rapid technological changes, highly competitive environment, new product introductions, seasonality, fluctuations in quarterly operating results, expansion into new markets and the Company's ability to implement successfully its acquisition and alliance strategy. Overview The Company develops, manufactures, markets and supports a broad range of equipment, software and systems that facilitate the production and enhance the presentation of live and pre-recorded video, audio and other data. The Company introduced the iNFiNiT!, its flagship product, in late 1990. Subsequently, the Company has introduced a broad range of graphics products such as the MAX!> and MAXINE!, CODI, LIBERTY, WiNFiNiT! and IMAGESTOR!. These products superimpose text, logos and other graphics onto a primary video image or create an independent image to be televised by itself. The Company expects that revenue from its current graphics and character generator systems will continue to constitute a substantial percentage of its net sales in the near future. The Company's Pro-Bel signal management systems interconnect video, audio and data signals to and from equipment within a studio's control room or edit suite, as well as to and from signal transmission sites. The Company was incorporated under the laws of the State of New York on April 8, 1966. In 1994, the Company restructured its West Coast operations, resulting in a charge of approximately $12.7 million. In 1997, as a result of the FCC's announcement on its position for HDTV, the Company took steps to position itself for the transition to HDTV, which included appointing a new Chief Executive Officer. The Company's current business strategy includes the following key elements: (i) position itself as the lead vendor in providing DTV and HDTV equipment to broadcasters as they make their transition to digital television in response to the recent FCC ruling; (ii) maintain and enhance its leadership position in current markets; (iii) provide upgrades to existing equipment; (iv) cross sell products to its existing customers; (v) address low-end and emerging markets; (vi) expand its global presence; (vii) pursue strategic acquisitions and alliances; and (viii) utilize open platforms. The Company intends to continue to serve its worldwide customer base by introducing products which address the requirements to improve the production and presentation of video, audio and other data. The Company also intends to continue to upgrade its current high performance systems, invest in the development of new options and enhancements for its products, and provide complete system solutions to its customers. Acquisition of Axis On March 31, 1997, the Company acquired Axis, located in Los Angeles, California. Axis develops software in professional video and audio tools created specifically for use on the Microsoft Windows NT Operating System. The aggregate cost of $1.83 million consisted of $413,000 in cash, $667,000 in two year promissory notes and 173,913 restricted shares of Chyron Corporation common stock valued at $750,000. The acquisition of Axis was accounted for as a purchase; therefore, the cost was allocated to the net tangible assets acquired based on their estimated fair values. The majority of the purchase price was capitalized as software development costs and will be amortized over the estimated economic life of the products, commencing when each product is available for general release. Acquisition of Pro-Bel On April 12, 1996, the Company acquired Pro-Bel, located in Reading, United Kingdom. Pro-Bel develops, manufactures and markets signal management systems and control and automation systems. The aggregate consideration of $19.1 million consisted of $6.9 million in cash, $5.3 million in two-year promissory notes and 1,048,735 restricted shares of common stock valued at $6.9 million. The acquisition of Pro-Bel was accounted for as a purchase. Accordingly, the cost was allocated to the net tangible assets acquired based upon their estimated fair values. The excess of cost over the estimated fair values of the net tangible assets acquired amounted to $6.9 million, which is being amortized over 12 years using the straight-line method. Investment in RT-SET On February 29, 1996, the Company purchased a 19% interest in Real Time Synthesized Entertainment Technology, Ltd. ("RT-SET"), which develops, markets and sells real time virtual studio set software and proprietary communications hardware and is located in Israel. The Company purchased shares of RT-SET Convertible Preferred Stock in exchange for 800,000 restricted shares of Chyron Corporation common stock. In addition, the Company was granted certain call option rights which, if and when exercised, allows the Company to purchase up to a 51% interest in RT-SET in exchange for the issuance of additional shares of common stock. In accordance with the purchase agreement, the 800,000 shares of common stock were to be held in escrow and released in two tranches, subject to certain conditions. One-third of such shares was released from escrow in June 1996 and the remainder will be released upon the earlier of a public offering of RT-SET's equity; or RT-SET achieving two consecutive years of profitability. Prior to any public offering by RT-SET or achievement of the aforementioned profitability, the Company has the right to recover the remaining two-thirds of its shares held in escrow in exchange for its interest in RT-SET. The transaction has been recorded as the purchase of a right to acquire a 19% interest in RT-SET (which was diluted to 17% as a result of a subsequent investment by a third party). RT-SET shall retain the voting rights with respect to the escrowed shares of the Company while such shares are held by the escrow agent. The acquisition was recorded at the estimated fair value of the restricted shares of common stock released from escrow. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Net Sales. Net sales increased 5.0% to $86.8 million in 1997 from $82.6 million in 1996. The increase was attributable to an increase in Pro-Bel product sales of 73% offset by a decrease in the Chyron Graphics line of 27%. The Pro-Bel increase is due to a combination of: (i) an increase in sales of the Pro-Bel product in the U.S. market; (ii) the fact that 1997 amounts represent 12 months of revenue, while 1996 represents revenue from the purchase date, April 12, 1996, through December 31, 1996, and (iii) increases in Pro-Bel sales in the European and other non-U.S. markets. Chyron sales declined mainly due to customers opting to fill their graphic needs with the Company's lower-end Chyron products based on the recent FCC ruling requiring broadcasters to utilize digital advanced television transmission beginning in 1998; such ruling should cause future capital expenditures by the broadcast industry. The Company's net sales consist of product sales, upgrades and enhancements and rental income as well as customer service revenue. Gross Profit. Gross profit decreased to $39.8 million in 1997 from $42.7 million in 1996. Gross margin as a percentage of net sales decreased to 45.9% in 1997 from 51.6% in 1996. This decrease was caused by increases in Pro-Bel sales for the year, which have historically lower margins than the Chyron lines, as well as decreases in the Chyron margin as a result of a shift in product mix from high-end products to lower-end products as described above. Customer service costs are included in selling, general and administrative expenses and are not material. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 32.7% to $29.7 million in 1997 from $22.3 million in 1996. As a percentage of net sales, selling, general and administrative expenses increased to 34.2% in 1997 from 27.1% in 1996. The increase is due mainly to the inclusion of Pro- Bel expenses for 12 months in 1997, while 1996 only included 9 months of expenses. Additional increases were due to an overall increase in sales volume and increases in headcount at both Chyron and Pro-Bel. Research and Development Expenses. Research and development expenses increased 29.9% to $6.8 million in 1997 from $5.3 million in 1996. This increase is mainly due to the inclusion of Pro-Bel's expenditures for a full twelve month period in 1997. Additional increases in R&D have been seen at both Chyron and Pro-Bel as the Company has focused its attention on new product development to address the FCC ruling described above as well as the continued development of the "Concerto" product line of Axis, which was acquired on March 31, 1997. These increases were offset by net capitalized software cost, (exclusive of the $1.7 million of the cost of Axis capitalized), which increased approximately $1.0 million for the twelve months ended December 31, 1997 versus the same period in 1996. Non-recurring Charges. For the twelve months ended December 31, 1997, non-recurring charges totaling $3.1 million were incurred by the Company. A non-recurring charge of $675,000 incurred in the first quarter of 1997 was attributable to the Company's planned secondary offering of common stock, which was terminated due to the change in the market valuation of the stock. During the second quarter of 1997, in an effort to position Chyron to meet the domestic television market's need for high definition and multichannel standard definition equipment that comply with the recent FCC rulings described above, the Company underwent a repositioning which, together with several other items, resulted in non-recurring charges in the second quarter totalling $2,407,000. Included in this charge was a write-down of inventory related to product lines which have been discontinued as a result of a new market positioning strategy, severance expense related to staff reduction, the write-off of software development projects related to products not within the new strategy, the consolidation of certain Chyron offices, the settlement of litigation dating back several years and the write-off of costs related to a potential acquisition that was abandoned due to the new strategy. The specific components of the non-recurring charge are as follows (in thousands): Non-cash outlays: Write-down of inventory $700 Write-off of software development costs 205 Litigation settlement - Issuance of Chyron common stock 88 Total non-cash charges 993 Cash outlays: Secondary offering termination 675 Severance 825 Write-off of acquisition costs 200 Litigation settlement 100 Other 289 Total $3,082 Cash outlays related to the non-recurring charges total $2.1 million, of which $1.6 million was made by December 31, 1997. Interest and Other Expense, Net. Interest and other expense, net, decreased 25.5% to $1.3 million in 1997 from $1.7 million in 1996. The decrease was due to the fact that in 1997 a foreign transaction gain of $423,000 was recognized, as opposed to a $264,000 loss recognized in 1996. This was due to the increase in the foreign exchange rate for British pounds sterling over the respective periods and the increased intercompany transactions between Chyron and Pro-Bel. This decrease was offset by increases in interest expense due to increases in average borrowing and interest rates over the comparable twelve month periods. (Loss) Income Before Provision for Income Taxes. The Company incurred a loss before taxes of ($978,000) compared to income of $13.4 million for the same prior year period. This loss was attributable mainly to the $3.1 million in non-recurring charges discussed above, coupled with decreases in sales of Chyron graphics products, the gross margin erosion as a result of product mix and increased SG&A and R&D expenses incurred in anticipation of the opportunity availing the Company as the industry transitions to HDTV. Income Taxes/Equivalent (Benefit) Provision. The Company recognized a $218,000 tax benefit for the twelve months ended December 31, 1997 compared to an income tax provision of $4.7 million for 1996. The tax benefit was primarily attributable to the loss of ($978,000) before taxes while the provision was based on pre-tax income of $13.4 million. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Net Sales. Net sales increased 53.1% to $82.6 million in 1996 from $53.9 million in 1995. Over 85% of the $28.7 million increase was attributable to the inclusion, since April 1996, of Pro-Bel's sales; Chyron's graphic products showed modest growth. The Company's net sales consist of product sales, upgrades and enhancements and rental income as well as customer service revenue. Gross Profit. Gross profit increased to $42.7 million in 1996 from $31.2 million in 1995. This increase was primarily attributable to the 53.1% increase in net sales. Gross margin as a percentage of net sales decreased to 51.6% in 1996 from 57.9% in 1995. This decrease was caused primarily by the inclusion since April 1996 of net sales of Pro-Bel products, which historically have had lower gross margins. The gross margin for the Chyron product lines decreased slightly, primarily as a result of the product mix for the year. Customer service costs are included in selling, general and administrative expenses and are not material. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 31.0% to $22.3 million in 1996 from $17.1 million in 1995. As a percentage of net sales, selling, general and administrative expenses decreased to 27.0% in 1996 from 31.6% in 1995. The increase in dollars was primarily due to the inclusion of Pro-Bel's operations since April 1996 and the accounting for the acquisition under the purchase method resulting in amortization of excess purchase price over net tangible assets acquired and increased depreciation, as well as increased costs as a direct result of increased sales volume. The decrease as a percentage of net sales was affected by the incurrence in 1995 of $443,000 of one-time legal and investment banking fees (incurred with respect to the undertaking of the Special Transaction Committee of the Board of Directors, which was appointed in connection with the potential change in control of the Company) and $430,000 of severance costs for former management. Research and Development Expenses. Research and development expenses increased 27.9% to $5.3 million in 1996 from $4.1 million in 1995. This increase was primarily due to the inclusion of Pro- Bel's research and development expenditures since April 1996. Research and development expenses related to Chyron's product lines decreased in 1996 in part due to an increase of approximately $800,000 in the amount of software capitalized and an increased percentage of research and development undertaken internally instead of by outside consultants. Interest and Other Expense, Net. Interest and other expense, net, increased 210.8% to $1,666,000 in 1996 from $536,000 in 1995. In conjunction with the Pro-Bel acquisition, the Company entered into various agreements with a bank, issued promissory notes (payable in pounds sterling) to the shareholders of Pro-Bel and assumed Pro- Bel's existing bank debt, all of which led to an increase of $866,000 in interest expense for the year. Net foreign currency transaction losses of $264,000 have been recognized in 1996 due to the change in the exchange rate from date of acquisition of Pro-Bel to December 31, 1996. Income Before Provision for Income Taxes. Income before provision for income taxes increased 68.6% to $13.4 million in 1996 from $7.9 million in 1995, primarily due to the improved operating income of Chyron coupled with the addition of the operating income generated by Pro-Bel. Additionally, in 1995, Chyron was subject to management fees of $2.9 million which were not in place in 1996. These fees were offset in 1995 by income of $1.3 million realized as a result of the recapture of restructuring charges recognized in 1994. Income Taxes/Equivalent Provision. Income taxes/equivalent provision increased to $4.7 million in 1996 from $470,000 in 1995, primarily because in 1995 an income tax benefit of approximately $2.2 million was realized as a result of the 1994 West Coast restructuring. The increase was also due to increased income before income taxes in 1996. Liquidity and Capital Resources At December 31, 1997, the Company had cash on hand of $3.0 million and working capital of $39.0 million. In connection with the acquisition of Axis, the Company issued promissory notes to the shareholders of Axis for $667,000. Installment payments are due on March 31, 1998 and 1999, with the timing of the amounts due being contingent upon the Axis division realizing certain revenue targets. See Note 2 to the Consolidated Financial Statements. $250,000 of such notes is due March 31, 1998 and will be paid from Chyron's operating cash flow. Interest is payable with the annual installments at a rate of 6% per annum. See Note 11 to the Consolidated Financial Statements. To finance the acquisition of Pro-Bel, the Company incurred additional debt of $7.2 million used cash on hand of $6.9 million and issued promissory notes to the shareholders of Pro-Bel for 3.5 million pounds sterling ($5.7 million, converted at the December 31, 1997 exchange rate). See Note 3 to the Consolidated Financial Statements. The promissory notes are secured and will be paid by an irrevocable letter of credit from a bank. The amount of this irrevocable letter of credit is included as an outstanding borrowing in the formula used to calculate borrowing availability for the Company's facility with Fleet Bank described below. Interest through April 15, 1998 is equal to LIBOR as of April 15, 1997 (7.03%) and is payable quarterly. Interest through April 15, 1997 was equal to LIBOR as of April 15, 1996 (6.46%). The notes are due on or before April 15, 1998 and are subordinated to any obligations to a bank or financial institution currently existing or subsequently entered into. The notes can be prepaid without penalty. See Note 11 to the Consolidated Financial Statements. Since the Pro-Bel acquisition, the Company's consolidated financial statements include the Pro-Bel accounts, as adjusted for purchase accounting. At the date of acquisition, inventory increased by $7.8 million, accounts receivable increased by $6.9 million and accounts payable increased by $9.5 million which, in sum with other current assets acquired and current liabilities assumed, increased working capital by $6.8 million. Additionally, at the date of acquisition, property and equipment increased by $8.8 million, excess of cost over net tangible assets acquired of $6.9 million was recorded and $3.6 million of Pro-Bel debt was assumed. On March 28, 1996 and April 16, 1996, the Company entered into agreements with Fleet Bank (formerly NatWest Bank) to obtain a revolving credit facility of $10.0 million and a term loan of $8.0 million, respectively. The entire facility is secured by certain of the Company's assets. Borrowings are limited to amounts computed under a formula for eligible accounts receivable and inventory. Interest on the revolving credit facility is equal to adjusted LIBOR plus 175 basis points or prime (8.50% at December 31, 1997) and is payable monthly. The term loan is payable in quarterly installments of $500,000, commencing June 1, 1996. Interest on the term loan is equal to adjusted LIBOR plus 200 basis points or prime and is payable monthly. At December 31, 1997, the Company did not comply with certain financial covenants and, accordingly, had obtained waivers for periods up to and including March 30, 1998 and amendments with respect to such covenants from its lender for periods up to and including April 16, 2000, the maturity date of the term loan. Currently management is negotiating an increase in the revolving credit facility with the Bank. The revolving credit facility is scheduled to expire on March 28, 1999. Management intends to renew such facility prior to the expiration date. See Note 11 to the Consolidated Financial Statements. Pro-Bel has a commercial mortgage term loan with Barclay's Bank Plc. ("Barclays"). The loan is secured by a building and property located in the United Kingdom. Interest is equal to LIBOR plus 2% (9.56% at December 31, 1997). The loan (including interest) is payable in quarterly installments of 80,600 pounds sterling ($133,000, converted at the December 31, 1997 exchange rate). See Note 11 to the Consolidated Financial Statements. On January 13, 1998, Pro-Bel entered into an agreement with Barclays whereby Barclays agreed to provide an overdraft facility of up to 4.0 million pounds sterling through December 31, 1998 to Pro-Bel, and its subsidiaries. The overdraft facility provides for interest at 1.5% per annum over the banks base rate. Interest is payable quarterly in arrears. This facility replaces the overdraft facility of up to 3.0 million pounds sterling in place at December 31, 1997. All monies under the facility are repayable upon written demand. Management intends to renew this facility on or about December 31, 1998. Total borrowings are limited to amounts computed under multiple formulas of eligible accounts receivable and inventory. On December 20, 1996, Pro-Bel entered into an agreement with a bank to obtain an overdraft facility of up to 3.0 million pounds sterling through December 31, 1997, subsequently extended to January 12, 1998 ($4,943,000 converted at the December 31, 1997 exchange rate). Total borrowings were limited to amounts computed under a formula for eligible accounts receivable. Interest was equal to the bank's base rate plus 1.5% (8.75% at December 31, 1997) and was payable in arrears. The facility was payable upon written demand by the bank and any undrawn portion was cancellable by the bank at any time. This facility was replaced by the facility with Barclays, described above, dated January 13, 1998. At December 31, 1997, the Company had operating and capital lease commitments totaling $12.9 million and $.8 million, respectively, of which $1.1 million and $.4 million, respectively is payable within one year. Such lease committments were for equipment, factory and office space and are expected to be paid out of operating cash flows of the Company. See Note 15 to the Consolidated Financial Statements. Impact of Inflation and Changing Prices Although the Company cannot accurately determine the precise effect of inflation, the Company has experienced increased costs of materials, supplies, salaries and benefits and increased general and administrative expenses. The Company attempts to pass on increased costs and expenses by developing more useful and cost effective products for its customers that can be sold at more favorable profit margins. Industry Transition to High Definition Television As discussed above, in October 1996, the FCC adopted a new digital television standard. Conversion to the new standard will produce potentially great opportunity to companies involved in the broadcast industry and related business, however, this change has caused uncertainty, hesitation and confusion for broadcasters and other customers in their decisions on capital spending. The delay in capital spending by broadcasters has affected Chyron graphic sales. The method and timing of broadcasters conversion to digital television is very important to the future profitability of Chyron. The Year 2000 The Company has taken actions to make its systems, products and infrastructure year 2000 compliant. The current budget includes an allocation of $400,000 for a new integrated information system at Pro-Bel. Management believes based on available information that aside from the amounts described above, additional year 2000 issues are immaterial and that the Company will be able to handle the year 2000 transition, without any material adverse effects on its business operations, products or financial prospects. REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Chyron Corporation In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 53 presents fairly, in all material respects, the financial position of Chyron Corporation and its subsidiaries at December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. New York, New York January 29, 1998 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CHYRON CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) December 31, Assets 1997 1996 Current Assets; Cash and Cash equivalents $2,968 $4,555 Accounts and notes receivable 21,125 25,237 Inventories 26,540 23,502 Prepaid expenses 1,897 865 Deferred tax asset 4,301 6,015 Other 283 1,419 Total current assets 57,114 61,593 Property and equipment 12,373 12,701 Excess of cost over net tangible assets acquired 6,779 6,439 Investment in RT-SET 2,161 2,161 Software development costs 5,224 2,176 Deferred tax asset 7,070 4,709 Other 3,359 1,624 TOTAL ASSETS $94,080 $91,403 Liabilities and Shareholders' Equity Current Liabilities: Accounts payable and accrued expenses $15,491 $13,925 Current portion of long-term debt 2,318 2,081 Capital lease obligations 350 225 Total current liabilities 18,159 16,231 Long-term debt 17,774 18,162 Capital lease obligations 2,007 1,903 Accrued pension expense 317 118 Other 1,861 1,043 Total liabilities 40,118 37,457 Commitments and contingencies (see Note 15) Shareholders' equity: Preferred stock, par value without designation; Authorized - 1,000,000 shares; Issued - none Common stock, par value $.01; Authorized - 150,000,000 shares; Issued and outstanding, 32,605,706 and 32,384,635 shares at 1997 and 1996, respectively 326 324 Addtional paid-in capital 44,016 43,124 Retained earnings 9,237 9,997 Cumulative translation adjustment 383 501 Total shareholders' equity 53,962 53,946 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $94,080 $91,403 See Notes to Consolidated Financial Statements CHYRON CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) year Ended December 31, 1997 1996 1995 Net sales $86,774 $82,608 $53,971 Cost of products sold 46,944 39,941 22,746 Gross profit 39,830 42,667 31,225 Operating expenses: Selling, general, and administrative 29,662 22,349 17,066 Research and development 6,822 5,253 4,105 Non-recurring charges 3,082 Management fee 2,911 West Coast restructuring charge (recapture) (1,339) Total operating expenses 39,566 27,602 22,743 Operating income 264 15,065 8,482 Interest and other expense, net 1,242 1,666 536 (Loss) income before provision for income taxes (978) 13,399 7,946 Income taxes/equivalent (benefit) provision (218) 4,745 470 Net (loss) income $(760) $8,654 $7,476 Net (loss) income per common share: Basic $(.02) $.27 $.26 Diluted $(.02) $.27 $.25 Weighted average shares used in computing net (loss) income per common share: Basic 32,538 31,825 29,379 Diluted 32,538 32,327 30,382 See Notes to Consolidated Financial Statements CHYRON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(760) $8,654 $7,476 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Non-recurring charges 890 West Coast restructuring (recapture) (1,339) Depreciation and amortization 4,137 3,120 2,067 (Provision) benefit of deferred income taxes (1,241) 2,335 354 Changes in operating assets and liabilities: Accounts and trade notes receivable 3,851 (3,505) (742) Inventories (3,575) (3,303) (6,181) Prepaid expenses (1,038) (117) 1,320 Other assets (600) (464) Accounts payable and accrued expenses 1,382 (2,865) 1,112 Other liabilities 936 Management fee payable (1,000) 1,000 Reserve for West Coast restructuring (1,327) Net cash provided by operating activities 3,982 2,855 3,740 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Axis (413) Acquisition of Pro-Bel and Investment in RT-SET (7,191) Acquisition of property and equipment (1,621) (1,802) (710) Capitalized software development (2,678) (1,268) (207) Other 52 28 Net cash (used in) investing activities (4,712) (10,209) (889) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of term loan (2,000) (1,500) Borrowings (Payments of) from revolving credit agreement, net 1,374 (4,144) (4,500) Payments of capital lease obligations (290) (262) (106) Net proceeds from new credit facility 11,976 4,741 Proceeds from exercise of common stock purchase warrants, net 239 471 proceeds from exercise of stock options 108 552 Other (52) Net cash (used in) provided by financing activities (860) 6,861 606 Effect of foreign currency rate fluctuations on cash and cash equivalents 3 36 Change in cash and cash equivalents (1,587) (457) 3,457 Cash and cash equivalents at beginning of year 4,555 5,012 1,555 Cash and cash equivalents at end of year $2,968 $4,555 $5,012 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $1,348 $1,636 $555 Income taxes paid $697 $2,920 $116 See Notes to Consolidated Financial Statements CHYRON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands) Non-cash investing and financing activities: On March 31, 1997, the Company acquired the issued and outstanding shares of Axis Holdings Incorporated. The consideration in addition to cash paid included the issuance of 173,913 shares of Chyron Corporation common stock valued at $750,000 and notes payable of $667,000. See Note 2 to the Consolidated Financial Statements. The Company recorded capital lease obligations of $614,000 during 1997 related to the acquisition of equipment. On February 29, 1996, the Company effectively acquired an option to acquire a 19% interest in RT-SET Ltd. in exchange for 800,000 shares of Chyron common stock. See Note 4 to the Consolidated Financial Statements. On April 12, 1996, the Company acquired the issued and outstanding shares of Pro-Bel. The consideration in addition to cash included 1,048,735 shares of Chyron common stock valued at $6,868,000 and notes payable of $5,349,000 (3.5 million pounds sterling valued at the exchange rate at the date of acquisition). See Note 3 to the Consolidated Financial Statements. CHYRON CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) Retained Additional Earnings Cumulative Paid-In (Accumulated Translation Shares Amount Capital Deficit Adjustment Balance at December 31, 1994 29,131 $291 $19,618 $(6,133) Net income 7,476 Exercise of warrants 726 7 464 Conversion of subordinated notes 167 2 98 Benefit of utilization of net net operating loss carryforward under Fresh Start Reporting 1,360 Income tax equivalent benefit from reduction of deferred tax asset valuation allowance 6,800 Balance at December 31, 1995 30,024 300 28,340 1,343 Net income 8,654 Exercise of warrants 398 4 235 Exercise of stock options 114 1 551 Issuance of stock in connection with acquisiton of Pro-Bel, Ltd. 1,049 11 6,857 Issuance of stock in connection with investment in RT-SET 800 8 1,942 Cumulative translation adjustment $501 Income tax equivalent benefit from reduction of deferred tax asset valuation allowance 5,199 Balance at December 31, 1996 32,385 324 43,124 9,997 501 Net loss (760) Exercise of stock options 22 108 Issuance of stock in connection with the acquisition of Axis 174 2 748 Issuance of shares in ocnnection with a litigation settlement 25 88 Payment of truncated shares as a result of reverse stock split (52) Cumulative translation adjustment (118) Balance at December 31, 1997 32,606 $326 $44,016 $9,237 $383 CHYRON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Chyron Corporation and its wholly-owned subsidiaries ("Chyron" or the "Company") develop manufacture, market and support a broad range of equipment, software and systems that facilitate the production and enhance the presentation of live and pre-recorded video, audio and other data. Chyron's wholly-owned United Kingdom subsidiary, Pro-Bel Limited ("Pro-Bel"), develops, manufactures and markets signal management systems and control and automation systems. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. On April 12, 1996, the Company acquired Pro-Bel and its subsidiaries (see Note 3). The Company established Chyron Overseas Limited June 5, 1997. The Company's other subsidiaries are inactive. Restatement and Reclassification On January 24, 1997, the Company's shareholders ratified a one-for- three reverse stock split. (Loss)/income per share, weighted average shares used in computing net (loss)/income per common share, common stock issued and outstanding, additional paid-in- capital and all other common stock transactions presented in these consolidated financial statements have been restated to reflect the one-for-three reverse stock split. In addition, certain prior year amounts have been reclassified to conform to the current year presentation. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the periods presented. Actual results could differ from those estimates. Cash and Cash Equivalents Cash includes cash on deposit and amounts invested in a highly liquid money market fund. Cash equivalents consist of short term investments with original maturities of three months or less. The carrying amount of cash and cash equivalents approximates their fair value. Inventories Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. The need for inventory obsolescence provisions is evaluated quarterly by the Company and, when appropriate, provisions for technological obsolescence, non- profitability of related product lines and excess quantities on hand are made. Property, Equipment and Depreciation Property and equipment are stated at cost. Depreciation and amortization are provided on the straight line method over the following estimated useful lives: Building 35 years Machinery and Equipment 3-10 years Furniture and Fixtures 5-10 years Leasehold Improvements Shorter of the life of improvement or remaining life of the lease Shorter of the life of improvement or remaining life of the leaseExcess of Cost over Net Tangible Assets Acquired The Company continually evaluates whether changes have occurred that would require revision of the remaining estimated useful life of the assigned excess of cost over the value of net tangible assets acquired (goodwill) or its carrying amount. In making such determinations, the Company evaluates undiscounted cash flows of the underlying business which gave rise to such amount. Approximately 91% of the Company's goodwill is a result of the 1996 acquisition of Pro-Bel Limited (see Note 3). Costs in excess of net assets are being amortized over 12 years using the straight line method. Amortization in 1997 and 1996 amounted to $603,000 and $487,000, respectively. Software Development Costs Certain software development costs are capitalized when incurred. Capitalization of software development costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs is continually monitored by management with respect to anticipated future revenues and estimated economic life. Amortization of capitalized software development costs is provided on a product-by- product basis over the products' estimated economic life, which ranges from 3-5 years, using the straight line method. Impairment of Long-Lived Assets The Company continually evaluates whether changes have occurred that would require revisions to the carrying amounts of its long- lived assets. In making such determination the Company reassesses market value, assesses recoverability, replacement values, and evaluates undiscounted cash flows of the underlying business in valuing goodwill. Currently management does not believe any of its long-lived assets are impaired. Revenue Recognition Net sales, which include revenue derived from product sales and upgrades as well as service revenue, are recorded upon shipment of product or performance of service. Customer service costs are included in selling, general and administrative expenses and are not material. Non-recurring Charges During 1997, the Company incurred non-recurring charges totaling $3.1 million related to both the 1) termination of the Company's planned secondary offering of common stock due to the decline in the market valuation of the Company's stock and 2) a respositioning by the Company to address recent FCC rulings, which will transition the domestic television market to DTV and HDTV. The principal components of the repositioning charge included a writedown of inventory related to product lines which have been discontinued as a result of a new market positioning strategy, severance expense related to staff reductions, write-off of software development projects related to products not within the new strategy, write-off of costs related to a potential acquisition that was abandoned due to the new strategy and the settlement of litigation dating back several years. These charges are included in the Company's operating expenses for the year. Income Taxes In connection with the Company's emergence in 1991 from its reorganization proceeding under Chapter 11 of the United States Bankruptcy Code, the Company adopted "Fresh Start Reporting" in accordance with AICPA Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Fresh Start Reporting requires that the Company report an income tax equivalent provision when there is book taxable income and a pre-reorganization net operating loss carryforward. This requirement applies despite the fact that the Company's pre-reorganization net operating loss carryforward would eliminate (or reduce) the related income tax payable. The current and future year benefit related to the carryforward is not reflected in net income, but instead is recorded as a direct increase to additional paid-in capital. The income tax equivalent provision does not affect the Company's tax liability. The Company's net deferred tax assets represent the tax benefit to be derived from the pre- and post- reorganization net deductible temporary differences and net operating loss carryfowards. Foreign Currencies The functional currency for the Company's foreign operations is the applicable local currency. The translation from the applicable foreign currency to U.S. dollars is performed for asset and liability accounts using period-end exchange rates and for revenue and expense accounts using a weighted average exchange rate during the periods. The gains or losses resulting from such translation are recorded in the cumulative translation adjustment account which is included in shareholders' equity. Transaction gains or losses are included in interest and other expenses. Net (Loss) Income Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which the Company has adopted for the year ended December 31, 1997. Accordingly, all prior period amounts have been restated to reflect this new statement. Basic net (loss)/income per common share is computed based on the weighted average number of common shares outstanding during the year. Diluted net (loss) income per common share is computed based on the weighted average number of common shares outstanding during the year plus, when dilutive, additional shares issuable upon the assumed exercise of outstanding common stock equivalents. Incremental shares of nil, 502,000 and 1,003,000 in 1997, 1996 and 1995, respectively were used in the calculation of diluted net (loss) income per share. For 1997 and 1996, outstanding common stock options of 2,458,423 and 396,302, respectively, were not included in the computation of diluted net (loss) income per common share because their effect would have been anti-dilutive. Comprehensive Income The Company has adopted Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income", for the year ended December 31, 1997. The components of comprehensive income which are excluded from net (loss)/income are not significant individually or in the aggregate and, therefore, no separate statement of comprehensive income has been presented. Common Stock Equivalents In December 1991, the Company issued to Pesa, Inc. ("Pesa"), a Delaware corporation, and its then majority shareholder, $5 million of Convertible Subordinated Notes ("Notes"). The Notes were convertible into shares of common stock at a conversion price of $.60 per share. As of December 31, 1995, all of the Notes had been so converted. In January 1992, shareholders of the Company, other than Pesa, received one warrant for every two shares of common stock held when the Company issued 1,931,851 Common Stock Purchase Warrants. Each warrant entitled its holder to purchase one share of common stock at $.60 per share. As of January 31, 1996, the expiration date of the warrants, a total of 1,736,182 Common Stock Purchase Warrants had been exercised. During 1995, 1996 and 1997, respectively, the Company's Board of Directors granted to certain employees 1,041,666, 435,000 and 1,215,834 Incentive and Non-Incentive Stock Options for the purchase of Chyron common stock and to non-employee members of the Board of Directors 30,000, 33,332 and 23,331 Non-Incentive Stock Options for the purchase of Chyron common stock. The exercise price of each stock option granted is the quoted closing market price at the date of such grant. See Note 12. Stock-Based Compensation Plans The Company elected to continue following Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", (APB 25) in accounting for its employee stock options, rather than adopt the alternate method of accounting provided under Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS 123). Under APB 25, the Company does not recognize compensation expense on stock options granted to employees because the exercise price of each option is equal to the market price of the underlying stock on the respective date of grant. See Note 12. 2. INVESTMENT IN AXIS HOLDINGS INCORPORATED On March 31, 1997, the Company acquired 100% of the capital stock of Axis Holdings Incorporated ("Axis") located in Los Angeles, California. Axis develops software in professional video and audio tools created specifically for use on the Microsoft Windows NT Operating System. The purchase consisted of $413,000 in cash paid, $667,000 in notes and 173,913 restricted shares of Chyron common stock valued at $750,000. As stated in the purchase agreement, the principal portion of the note is to be paid in two successive annual installments. Installment payment amounts are contingent upon Axis achieving certain revenue targets. The timing of the installments of $250,000 and $417,000 are due on March 31, 1998 and March 31, 1999, respectively. Interest is to be paid at the rate of 6% per year and is due with the annual installments. Additionally, payments equal to 20% of cumulative net profits, as defined, on the Axis product line, in excess of $1 million, will be payable to the sellers. The period for the calculation of cumulative net profits is March 31, 1997 through December 31, 1999. At December 31, 1997, there were no profits yet accumulated on the Axis product line. Payments due for each year will be made on or before April 30 of the next succeeding year. The acquisition was accounted for as a purchase. Accordingly, the costs of the acquisition were allocated to the net assets acquired based on their estimated fair values. The majority of the purchase price was capitalized as software development costs and will be amortized over the estimated economic life of the products (not to exceed 5 years), commencing when each product is available for general release. 3. ACQUISITION OF PRO-BEL LIMITED On April 12, 1996, the Company acquired Pro-Bel in exchange for $6.9 million in cash, 3.5 million British pounds sterling ($5.3 million at the exchange rate of date of acquisition) in notes and 1,048,735 shares of restricted Chyron common stock valued at $6.9 million. The acquisition of Pro-Bel was accounted for as a purchase. Accordingly, the cost of the acquisition was allocated to the net assets acquired based upon their estimated fair values. The following summary financial data includes the proforma operating results of the Company and Pro-Bel for the year ended December 31, 1996, assuming the acquisition of Pro-Bel had been made as of January 1, 1996 (in thousands except per share amounts). Unaudited Proforma December 31, 1996 Net Sales $92,974 Net (loss) income $8,633 Net (loss) income per share $.27 These pro forma results have been prepared for comparative purposes only and include adjustments as a result of applying purchase accounting and conversion to generally accepted accounting principles in the United States, such as additional depreciation expense and cost of goods sold due to the step-up in the basis of fixed assets and inventory, respectively, goodwill amortization, a decrease in research and development due to the capitalization of software development costs net of the amortization of such costs, increased interest expense on acquisition debt and the estimated income tax effect on the acquisition financing. The pro forma financial information is not necessarily indicative of the operating results that would have occurred if the acquisition had taken place on the aforementioned dates or of future results of operations of the consolidated entities. 4. INVESTMENT IN RT-SET On February 29, 1996, the Company effectively purchased an option to acquire a 19% interest in Real Time Synthesized Entertainment Technology, Ltd. ("RT-SET"), located in Tel Aviv, Israel. RT-SET develops, markets and sells real time virtual studio set software and proprietary communications hardware that operate on Silicon Graphics systems. In form, Chyron purchased shares of RT-SET Convertible Preferred Stock, which are convertible into RT-SET common stock, in exchange for 800,000 shares of Chyron restricted common stock. In accordance with the purchase agreement, the 800,000 shares of Chyron common stock were to be held in escrow and released in tranches of one-third and two-thirds, subject to certain conditions. During 1996, the first of these conditions was met, which resulted in the release of 266,666 shares of Chyron restricted common stock to RT-SET. Upon the satisfaction of the remaining conditions, the remaining 533,334 escrowed shares will be released. If the conditions are not met or at Chyron's option, the remaining shares of Chyron restricted common stock held in escrow will be returned to the Company in exchange for the RT-SET Convertible Preferred Stock held by the Company. Accordingly, the transaction has been recorded as the purchase of a right to acquire a 19% interest in RT-SET (which was diluted to 17% as a result of a subsequent investment by a third party). RT-SET retains the voting rights with respect to the escrowed Chyron shares while such shares are held by the escrow agent. The investment was recorded and is currently carried at the then estimated fair value of the Chyron restricted common stock released from escrow. In addition, Chyron was granted certain call option rights which, if and when exercised, will result in the Company owning up to a 51% interest in RT-SET. 5. CONTROL OF REGISTRANT Prior to July 25, 1995, the Company's majority shareholder and parent was Pesa, Inc. ("Pesa"). Pursuant to two agreements dated May 26, 1995 and July 25, 1995, Pesa sold all of its shares of Chyron Corporation (19,804,904) to an investor group. Additionally, Sepa Technologies, Ltd. ("Sepa") an affiliate of Pesa, sold 1,666,667 of its shares of Chyron Corporation and the voting rights and right of first refusal with respect to an additional 3,000,000 shares owned by Sepa to the same investor group. 6. ACCOUNTS AND NOTES RECEIVABLE Trade accounts and notes receivable are stated net of an allowance for doubtful accounts of $3,124,000 and $2,850,000 at December 31, 1997 and 1996, respectively. The provision for doubtful accounts amounted to $533,000, $nil, and $466,000 for 1997, 1996 and 1995, respectively. The carrying amounts of accounts and notes receivable approximate their fair values. The Company periodically evaluates the credit worthiness of its customers and determines whether collateral (in the form of letters of credit or liens on equipment sold) should be taken or whether reduced credit limits are necessary. Credit losses have consistently been within management's expectations. Accounts and notes receivable are principally due from customers in, and dealers serving, the broadcast video industry and non-broadcast display markets. At December 31, 1997 and 1996, receivables included approximately $13.6 million and $12.5 million, respectively, due from foreign customers. 7. INVENTORIES Inventories consist of the following (in thousands): December 31, 1997 1996 Finished goods $12,346 $12,879 Work-in-process 9,303 5,271 Raw material 4,891 5,352 $26,540 $23,502 8. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands): December 31, 1997 1996 Land $798 $798 Building 1,619 1,619 Machinery and equipment 14,019 12,175 Furniture and fixtures 2,287 2,098 Leashold improvements 727 691 19,450 17,381 Less: Accumulated depreciation and amortization 7,077 4,680 $12,373 $12,701 Machinery and equipment at December 31, 1997 and 1996 includes $1,045,000 and $818,000, respectively, of assets held under capital lease obligations. Accumulated depreciation at December 31, 1997 and 1996 includes $516,000 and $381,000, respectively, attributable to assets held under capital lease obligations. See Note 15. Depreciation expense, which includes amortization of capital lease assets, was $2,362,000, $1,671,000 and $1,054,000 in 1997, 1996 and 1995, respectively. 9. SOFTWARE DEVELOPMENT COSTS The following amounts were capitalized, amortized and written off (in thousands): 1997 1996 1995 Amounts capitalized $4,425 $1,420 $207 Less: Amortization (included in Research and Development expense) (1,172) (960) (1,013) Non-recurring charge-writedown to net realizable value (205) Net increase (decrease) in software development costs $3,048 $460 $(806) Capitalized amounts for 1997 include $1.7 million arising from the purchase of Axis (See Note 2). Accumulated amortization at December 31, 1997 and 1996 was $4,554,000 and $3,177,000, respectively. 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following (in thousands): December 31, 1997 1996 Accounts payable $7,948 $7,500 Compensation 1,898 1,741 Income taxes payable 486 1,225 Other accrued items 5,159 3,459 $15,491 $13,925 The carrying amounts of accounts payable and accrued expenses approximate their fair values. 11. LONG-TERM DEBT Long term debt consists of the following (in thousands): December 31, 1997 1996 Term loan, maturing April 16, 2000 (a) $4,500 $6,500 Revolving credit facility, maturing March 28, 1999 (a) 2,730 2,730 Commercial mortgage term loan, maturing March 28, 2010 (c) 1,965 2,097 Promissory notes, payable on or before April 15, 1998 (d) 5,766 5,917 Trade finance facility maturing December 31, 1997 replaced with debt maturing December 31, 1998 (g) 4,464 Promissory notes, payable in installments on March 31, 1998 and March 31, 1999 (b) 667 Trade finance facility, maturing December 31, 1996 replaced with debt maturing December 31, 1997 (e) 1,209 Overdraft facility, maturing December 31, 1996 replaced with debt maturing December 31, 1997 (f) 1,790 20,092 20,243 Less amounts due in one year 2,318 2,081 $17,774 $18,162 a) On March 28, 1996 and April 16, 1996, the Company entered into agreements with a bank to obtain a revolving credit facility of $10 million and a term loan of $8 million, respectively. The entire facility is secured by Chyron's accounts receivable and inventory and the common stock of Pro-Bel. Borrowings are limited to amounts computed under a formula for eligible accounts receivable and inventory. Interest on the revolving credit facility is equal to adjusted LIBOR plus 175 basis points or prime (8.50% at December 31, 1997) and is payable monthly. The term loan is payable in quarterly installments of $500,000, commencing June 1, 1996. Interest on the term loan is equal to adjusted LIBOR plus 200 basis points or prime and is payable monthly. The Company must pay a commitment fee equal to 1/4 of 1% per annum on the average daily unused portion of the credit facility. The commitment fee is payable on the last day of each quarter commencing June 30, 1996. This agreement contains, among other provisions, requirements for maintaining defined levels of net worth, leverage, capital expenditures, lease payments and various financial ratios. The Company is prohibited by the agreement from paying cash dividends in excess of 25% of its net income for the then current fiscal year. As of December 31, 1997, the Company did not comply with certain financial covenants; however, it has received from its lender waivers for periods up to and including March 30, 1998 and amendments with respect to certain covenants for periods up to and including April 16, 2000, the maturity date of the term loan. (b) On March 31, 1997, the Company issued promissory notes to the shareholders of Axis for $667,000 in conjunction with the acquisition (see Note 2). Installment payments are due on March 31, 1998 and 1999. Interest is payable with the annual installments, at a rate of 6% per annum. The Company will pay the first installment due March 31, 1998 of $250,000 out of operating cash flow. (c) Pro-Bel has a commercial mortgage term loan with a bank. The loan is secured by a building and property located in the United Kingdom. Interest is equal to LIBOR plus 2% (9.56% at December 31, 1997) . The loan (including interest) is payable in quarterly installments of 80,600 pounds sterling ($133,000, converted at the December 31, 1997 exchange rate). (d) On April 12, 1996, the Company issued promissory notes to the shareholders of Pro-Bel for 3.5 million pounds sterling ($5,766,000, converted at the December 31, 1997 exchange rate and $5,919,000 converted at the December 31, 1996 exchange rate) in conjunction with the acquisition (see Note 3). The promissory notes are secured and will be paid by an irrevocable letter of credit from a bank. The amount of this irrevocable letter of credit will be drawn against the revolving credit facility described in (a) above, which expires in 1999. Interest from April 16, 1997 through April 15, 1998 is equal to LIBOR as of April 15, 1997 (7.03%) and is payable quarterly. Interest through April 15, 1997 was equal to LIBOR as of April 15, 1996 (6.46%) and was payable quarterly. The notes are due on or before April 15, 1998 and are subordinated to any obligations to a bank or financial institution currently existing or subsequently entered into. (e) On February 1, 1996, Pro-Bel entered into an agreement with a bank to obtain a trade finance facility of 750,000 pounds sterling ($1,267,000, converted at the December 31, 1996 exchange rate). The facility was secured by Pro-Bel's accounts receivable. Interest was equal to the bank's base rate plus 2% (8% at December 31, 1996) on advances against accounts receivable in pounds sterling and equal to the Barclays Bank PLC currency call loan rate plus 2% (8% at December 31, 1996) on advances against foreign accounts receivable. Interest was payable quarterly, in arrears. At December 20, 1996 this facility was replaced by the facility described in (g) below. (f) On February 1, 1996, Pro-Bel entered into an agreement with a bank to obtain an overdraft facility of 750,000 pounds sterling ($1,276,000 converted at the December 31, 1996 exchange rate). Interest was equal to the bank's base rate plus 2.5% (8.5% at December 31, 1996) and was payable quarterly commencing in March 1996. The facility had a sublimit for overdraft on Pro-Bel's wholly owned subsidiary, Trilogy Broadcast Limited, of 160,000 pounds sterling ($270,000, converted at the December 31, 1996 exchange rate). At December 20, 1996, this facility was replaced by the facility described in (g) below. (g) On December 20, 1996, Pro-Bel entered into an agreement with a bank, to obtain an overdraft facility of up to 3.0 million pounds sterling through December 31, 1997 and extended through January 12, 1998. ($4,943,000 converted at the December 31, 1997 exchange rate). Total borrowings are limited to amounts computed under a formula for eligible accounts receivable. Interest is equal to the bank's base rate plus 1.5% (8.75% at December 31, 1997) and is payable quarterly commencing March 1997. The facility has sublimits for overdraft for Pro-Bel's wholly owned subsidiaries. The facility is payable upon written demand by the bank and any undrawn portion may be cancelled by the bank at any time. This facility was replaced by a new facility dated January 13, 1998, with the same bank as desribed below. On January 13, 1998, Pro-Bel entered into an agreement with a bank whereby the bank agreed to provide an overdraft facility of up to 4.0 million pounds sterling through December 31, 1998 to Pro-Bel and its subsidiaries. The overdraft facility provides for interest at 1.5% per annum over the bank's base rate. Interest is payable quarterly in arrears. This facility replaces the overdraft facility of up to 3.0 million pounds sterling in place at December 31, 1997 desribed at (g) above. All monies under the facility are repayable upon written demand. Total borrowings are limited to amounts computed under multiple formulas of eligible accounts receivable and inventory. It is the Company's intent to refinance this facility prior to its expiration date. Accordingly, the Company has classified this debt as long-term. Aggregate maturities of long term debt in the next five years are as follows (in thousands): 1998 $2,318 1999 15,447 2000 572 2001 74 2002 76 The carrying amounts of long-term debt instruments approximate their fair values. Net interest expense was $1,665,000, $1,402,000 and $536,000 in 1997, 1996 and 1995, respectively. 12. LONG-TERM INCENTIVE PLAN In May 1995, the Company's shareholders approved the Chyron Corporation Long-Term Incentive Plan ("the Plan"). The Plan, as amended in May 1997, allows for a maximum of 3,000,000 shares of common stock to be available with respect to the grant of awards under the Plan. The Plan allows for the award of incentive and non-incentive options to employees and non-incentive options to non-employee members of the Company's Board of Directors. Options issued to employees other than the Company's Chief Executive Officer ("CEO") vest over a three year period. Certain options issued to the CEO vest one third at issuance, with the remaining two thirds vesting over two years. Additional options issued to the CEO vest based on the earlier of the attainment of specified criteria or June 5, 2003. Options issued to non-employee members of the Company's Board of Directors vest immediately. Transactions involving stock options are summarized as follows: Stock Options Outstanding Price per share Balance, January 1, 1995 Granted 1,071,665 $4.875-$5.625 Exercised Cancelled Balance, December 31, 1995 1,071,665 $4.875-$5.625 Granted 468,332 $9.375-$16.125 Exercised (113,018) $4.875-$5.625 Cancelled (86,666) $4.875 Balance, December 31, 1996 1,340,313 $4.875-$16.125 Granted 1,767,498 $4.25-$5.875 Exercised (22,220) $4.875 Cancelled (627,168) $9.00-$12.75 Balance, December 31, 1997 2,458,423 $4.25-$16.125 The following table summarizes information concerning currently outstanding and exercisable stock options: Weighted Outstanding Average Exerciseable Exercise at December Contractual at December Price 31, 1997 Life 31, 1997 $4.875 675,760 2.6 years 421,870 5.625 76,666 2.8 years 59,999 9.375 6,666 3.2 years 6,666 16.125 23,333 3.6 years 23,333 12.750 3,333 3.8 years 3,333 5.875 511,667 4.3 years 0 4.500 23,331 4.6 years 23,331 4.250 700,000 6.5 years 166,667 5.375 437,666 9.8 years 0 2,458,423 705,199 If the Company had elected to recognize compensation expense based upon the fair values at the grant date for awards under this plan consistent with the methodology prescribed by SFAS No. 123, "Accounting for Stock Based Compensation", the Company's net (loss) income and net (loss) income per share would be reduced to the pro forma amounts indicated below: 1997 1996 1995 Net (loss) income (in thousands): As reported $(760) $8,654 $7,476 Pro forma $(2,866) $7,560 $7,125 Net (loss) income per common share: As reported $(.02) $.27 $.25 Pro forma $(.09) $.23 $.24 These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period for purposes of future pro forma disclosures, and additional options may be granted in future years. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 1997, 1996 and 1995: dividend yield of 0; expected volatility of 50% and expected life of 4 years. The weighted average risk free interest rates for 1997, 1996 and 1995 were 6.19%, 6.54% and 6.11%, respectively. The weighted average fair values of options granted during 1997, 1996 and 1995, for which the exercise price equaled the market price on the grant dates, were $5.254, $12.870 and $4.931 per option, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected price volatility. Because the Company's employees' stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements' opinion, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. 13. INCOME TAXES The (benefit) provision for income taxes consists of the following (in thousands): 1997 1996 1995 Current: Federal $(611) $1,308 $ State 4 629 50 Foreign 1,036 473 Tax equivalent provision 420 429 2,410 470 Deferred: Federal (647) 2,664 State (150) Foreign (39) Release of valuation reserve (140) (647) 2,335 $(218) $4,745 $470 The effective income tax rate differed from the Federal statutory rate as follows (in thousands): 1997 1996 1995 Amount % Amount % Amount % Federal income tax benefit provision at statutory rate ($333) (34.0) $4,689 35.0 $2,702 34.0 State income taxes, net of federal tax benefit 3 0.3 409 3.0 33 .4 Permanent differences 35 3.6 36 .3 Benefit from post reorganization temporary differences on tax equivalent provision (140) (1.1) (1,351) (17.0) Foreign income tax benefit 8 .1 Provision (benefit) of lower tax rates on U.S. Federal Provision 169 17.2 (121) (.9) Effect of valuation allowance of deferred tax assets (150) (1.1) (940) (11.8) Other, net (92) (9.4) 14 .1 (940) (11.8) ($218) (22.3) $4,745 35.4 $470 5.9 The Company has deferred tax assets and deferred tax liabilities as presented in the tables below. December 31, 1997 1996 Post-reorganization net operating loss carryforward $3,433 $276 Pre-reorganization net operating loss carryforward 4,631 4,631 Pre-reorganization deductible temporary differences 3,067 4,555 Other 1,976 2,030 Total deferred tax assets $13,107 $11,492 December 31, 1997 1996 Pre-reorganization taxable temporary differences 85 85 Software development costs 913 683 Other 738 Total deferred tax assets $1,736 $768 At December 31, 1997, the Company had U.S. Federal net operating loss carryforwards ("NOL") of approximately $23.7 million for tax purposes, expiring beginning with the year 2001 through 2012. Under U.S. income tax rules, the utilization of a portion of the NOL ($13.6 million) is subject to annual limitations as a result of the changes in control of the Company at December 27, 1991 and July 25, 1995. However, despite these restrictions, the Company expects to fully utilize all of its remaining NOL prior to expiration. 14. BENEFIT PLANS Chyron Corporation has a domestic defined benefit pension plan (the "U.S. Pension Plan") covering substantially all U.S. employees meeting minimum eligibility requirements. Benefits paid to retirees are based upon age at retirement, years of credited service and average compensation. Pension expense is actuarially determined using the projected unit credit method. The Company's policy is to fund the minimum contributions required under the Employees Retirement Income Security Act. The assets of the U.S. Pension Plan at December 31, 1997 include government bonds, equities, mutual funds and cash and cash equivalents. 1997 1996 1995 Service cost $444 $414 $383 Interest cost on projected benefit obligations 294 267 292 Actual return on plan assets (277) (206) (227) Net amortization 3 (43) (15) Net periodic pension cost $464 $432 $433 The net periodic pension cost and its components are as follows (in thousands): A reconciliation of the funded status of the U.S. Pension Plan to the amounts included in the Company's balance sheet is as follows (in thousands): December 31, 1997 1996 1995 Accumulated pension benefit obligation: Vested $2,580 $2,234 $2,265 Non-vested 44 29 79 Total $2,624 $2,263 $2,344 Projected benefit obligation $4,502 $3,803 $4,138 Plan assets at fair value 2,895 2,709 2,609 Projected benefit obligation in excess of assets 1,607 1,094 1,529 Less items not yet recognized in net periodic pension costs: Unrecognized net gain from past experience and changes in assumptions 400 809 49 Pension liability $2,007 $1,903 $1,578 In each year presented, the expected long-term rate of return on U.S. Pension Plan assets was 9%. The weighted average discount rates used to determine the accumulated benefit obligation were 7.5% in 1997, 8.0% in 1996 and 7.5% in 1995. The rate of compensation increase used was 5% for all years presented. Pro-Bel has a non-contributory defined benefit pension plan (the "U.K. Pension Plan") covering all its permanent employees. Contributions are determined on the basis of valuations using the projected unit method. Pro-Bel's policy is to fund minimum contributions required pursuant to U.K. rules and regulations. The assets of the U.K. Pension Plan at December 31, 1997 include cash equivalents and land and a building. The net periodic pension cost of the U.K. Pension Plan for 1997 and for the period since the acquisition of Pro-Bel (April 12, 1996) through December 31, 1996 and its components under the provisions of SFAS No. 87 were as follows (in thousands): 1997 1996 Service cost-benefit earned during the period $548 $303 Interest cost on projected benefit obligation 446 285 Actual return on plan assets (420) (457) Net amortization (224) 0 Net periodic pension cost $350 $131 A reconciliation of the funded status of the U.K. Pension Plan to the amounts included in the Company's balance sheet is as follows (in thousands): December 31, 1997 1996 Accumulated pension benefit obligation Vested $6,595 $4,867 Non-vested Total $6,595 $4,867 Projected benefit obligation $7,347 $5,739 Plan assets at fair value 9,289 7,005 Plan assets at fair value in excess of projected benefit obligation 1,942 1,266 Items not yet recognized in net periodic pension cost: Unrecognized net gain from past experience and changes in assumptions 1,162 141 Pension asset $3,104 $1,407 The expected long-term rate of return on the U.K. Pension Plan assets was 8% in 1997 and 9% in 1996. The weighted average discount rate used to determine the accumulated benefit obligation was 7% in 1997 and 8% in 1996. The rate of compensation increase used was 5.0% in 1997 and 5.5% in 1996. Chyron Corporation has adopted a 401(k) Plan exclusively for the benefit of participants and their beneficiaries. All employees of Chyron Corporation are eligible to participate in the 401(k) Plan except non-resident aliens and employees who are members of a union which bargains separately for retirement benefits during negotiations. An employee may elect to contribute a percentage of his or her current compensation to the 401(k) Plan, subject to a maximum of 20% of compensation or the Internal Revenue Service annual contribution limit ($9,500 in 1997 and 1996), whichever is less. Total compensation that can be considered for contribution purposes is limited to $150,000. Chyron Corporation can elect to make a contribution to the 401(k) Plan on behalf of those participants who have made salary deferral contributions. During 1997, 1996 and 1995 the Company contributed $63,000, $51,000 and $29,000, respectively, to the 401(k) Plan. 15. COMMITMENTS AND CONTINGENCIES At December 31, 1997, the Company was obligated under operating and capital leases covering facility space and equipment as follows (in thousands): Operating Capital 1998 $1,147 $432 1999 1,214 223 2000 1,243 160 2001 1,104 2002 1,090 2003 and thereafter 7,124 $12,922 $815 The operating leases contain provisions for escalations for maintenance and real estate taxes. Total rent expense was $965,000, $826,000 and $496,000 for 1997, 1996 and 1995, respectively. The cumulative imputed interest in the capital lease obligation was $148,000 at December 31, 1997. The Company from time to time is involved in routine legal matters incidental to its business. In the opinion of management, the ultimate resolution of such matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. 16. RELATED PARTY TRANSACTIONS Sepa, prior to the change in control discussed in Note 5, was the beneficial owner of 24,471,570 shares of Chyron common stock. Consequent to such ownership, Sepa had an amended and restated management agreement with Chyron whereby Chyron agreed to pay management fees to Sepa equal to 2.5% of consolidated revenues through December 31, 1997. The management fees under this agreement were subject to an annual limitation of $1.5 million. In July 1994, Chyron took advantage of an option to prepay the management fee at a 25% discount from the aggregate estimated yearly fees for the period July 1, 1994 through December 31, 1995, resulting in estimated aggregate total savings of $486,000 in fees for the eighteen month period ending December 31, 1995. In December 1995, Chyron and Sepa agreed to terminate the Management Agreement upon payment to Sepa of $2 million, which resulted in aggregate savings for the Company of $1 million for the two year period ending December 31, 1997. The $2 million was paid in equal installments in December 1995 and January 1996. The Secretary of the Company and an individual who held a board seat through May 1997 are partners in a law firm that rendered various legal services to the Company for which the Company incurred costs of $783,000 and $861,000 during 1997 and 1996, respectively. 17. WEST COAST RESTRUCTURING During the third quarter of 1994, as the result of continuing significant operating losses by the Company's West Coast Operations and its inability to meet revenue and operating targets, management implemented a restructuring plan to eliminate a substantial number of product lines and consolidate certain remaining products into the Company's Graphics Operations, with only certain product engineering capabilities remaining on the West Coast. As a result, the Company recorded a $12.7 million charge to operations during the third quarter of 1994, resulting from headcount reductions, consolidation costs, write-downs of assets related to discontinued product lines and accrual of estimated operating losses anticipated during the disposition period. During 1995, operating losses of $1,707,000 related to the discontinued product lines were charged against the reserve for West Coast restructuring. During 1995, $1,339,000 of such charge was recaptured as a result of (1) the Company entering into an agreement to sublease a portion of the office space, thereby decreasing future rent commitments (the Company reversed $356,000 of the original $12.7 million charge to account for the decrease in projected rent expense), (2) the Company selling certain inventory that had been fully reserved for in the original $12.7 million charge (as a result, the Company realized a gain of $380,000 related to this inventory) and (3) the reversal of $603,000 of the original restructuring charge as a result of lower than anticipated costs related to the disposition period. 18. SEGMENT INFORMATION Chyron's business is organized under a group concept that coordinates product development, marketing, advertising, distribution and procurement. The Company has a multi-product approach for filling customer requirements for equipment and systems used in video or film productions. These products include graphics and character generation systems, video and audio signal management systems and electronic paint and animation systems and software. Customers for the Company's products include broadcasters, video production and post-production companies, cable television distributors and operators, industrial users, governments and governmental agencies and domestic and international dealers serving the video production and display industries for non-broadcast and broadcast markets. As a result, the Company operates as one business segment. The Company's operations are located primarily in the United States and Europe. Foreign operations prior to 1996 and interarea sales were not significant. Net sales, operating profit and identifiable assets by geographic areas consist of the following (in thousands): December 31, 1997 1997 Net Operating Identifiable Sales Income Assets United States $37,039 $(2,817) $51,160 Europe 41,915 3,157 42,860 Other 7,820 (76) 60 Total $86,774 $264 $94,080 December 31, 1996 1996 Net Operating Identifiable Sales Income Assets United States $55,446 $12,764 $52,988 Europe 24,281 1,611 38,375 Other 2,881 690 40 Total $82,608 $15,065 $91,403 During 1997, 1996 and 1995, net export sales from the United States were approximately $10,129,000, $9,580,000 and $7,511,000, respectively. For 1997 and 1996, income before taxes from foreign operations totalled $2.2 million and $3.5 million, respectively, and (loss) income before taxes for domestic operations totalled ($3.2) million and $9.9 million, respectively. During 1997 and 1996, foreign exchange gains of $423,000 and losses of $264,000, respectively, are included in other expenses. PART III Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and Related Transactions) will be incorporated in the Company's Proxy Statement to be filed within 90 days of December 31, 1997 and are incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following Consolidated Financial Statements of Chyron Corporation and subsidiaries are included in Part II, Item 8: Report of Independent Auditors - Price Waterhouse, LLP - page 23 Consolidated Balance Sheets at December 31, 1997 and 1996 - page 25 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 - page 26 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 - page 27 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 - page 29 Notes to the Consolidated Financial Statements - page 30-51 (2) Financial Statement Schedule The following Consolidated Financial Statement schedule of Chyron Corporation and subsidiaries is included in Item 14(d): Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1997, 1996 and 1995 - page 58 All other schedules called for under Regulation S-X are not submitted because they are not applicable or not required or because the required information is not material or is included in the Consolidated Financial Statements or notes hereto. (3) Financial Statement Exhibits See list of exhibits to the Financial Statements in Section (c) below: (b) Reports on Form 8-K None (c) Exhibits 2. Plan of acquisition, reorganization, arrangement, liquidation or succession. (a) First Amended Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code, dated October 28, 1991 (with First Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code attached as Exhibit A thereto) - Note 2 3. Articles of Incorporation and By-Laws. (a) Restated Certificate of Incorporation of Chyron Corporation - Note (1) (b) Amended and Restated By-Laws of Chyron Corporation, adopted February 17, 1995 - Note(3) (c) Amendment of Certificate of Incorporation of Chyron Corporation, adopted January 24, 1997 - Note (9) 4. Instruments defining rights of security holders, including debentures. (b) Registration Rights Agreement, dated December 27, 1991, between Chyron Corporation and Pesa, Inc. - Note (2) (c) Registration Rights Agreement dated July 25, 1995 by and between Chyron Corporation and CC Acquisition Company A, L.L.C., CC Acquisition Company B, L.L.C., WPG Corporate Development Associates, IV, L.P., WPG Corporate Development Associates IV (Overseas), L.P., WPG Enterprise Fund II, L.P. Weiss, Peck & Greer Venture Associates, III, L.P., Westpool Investment Trust PLC, Lion Investment Limited, Charles Diker, Mint House Nominees Limited, Pine Street Ventures, L.L.C., Isaac Hersly, Alan I. Annex, Ilan Kaufthal, Z Four Partners L.L.C. and A.J.L. Beare - Note 8 10. Material Contracts. (a) Distribution and License Agreement, dated September 22, 1994, between Chyron Corporation and Comunicacion Integral Consultores, S.L - Note 3 (b) Termination Agreement, dated November 6, 1995, between Chyron Corporation and Comunicacion Integral Consultores, S.L. - Note 8 (c) Loan Agreement between Chyron Corporation and NatWest Bank. .N.A. (currently known as Fleet Bank), dated March 28, 1996 - Note 9 (d) Loan Agreement between Pro-Bel Limited and Barclays Bank, PLC dated December 19, 1996 effective January 1997 - Note 9 (e) Indemnification Agreement between Chyron Corporation and Roi Agneta dated November 19, 1996 - Note 9 (f) Indemnification Agreement between Chyron Corporation and James Coppersmith dated November 19, 1996 - Note 9 (g) Indemnification Agreement between Chyron Corporation and Daniel DeWolf dated November 19, 1996 - Note 9 (h) Indemnification Agreement between Chyron Corporation and Charles M. Diker dated November 19, 1996 - Note 9 (i) Indemnification Agreement between Chyron Corporation and Donald P. Greenberg dated November 19, 1996 - Note 9 (j) Indemnification Agreement between Chyron Corporation and Ray Hartman dated November 19, 1996 - Note 9 (k) Indemnification Agreement between Chyron Corporation and Roger Henderson dated November 19, 1996 - Note 9 (l) Indemnification Agreement between Chyron Corporation and Alan J. Hirschfield dated November 19, 1996 - Note 9 (m) Indemnification Agreement between Chyron Corporation and Patricia Lampe dated November 19, 1996 - Note 9 (n) Indemnification Agreement between Chyron Corporation and Wesley W. Lang, Jr. dated November 19, 1996 - Note 9 (o) Indemnification Agreement between Chyron Corporation and Eugene M. Weber dated November 19, 1996 - Note 9 (p) Indemnification Agreement between Chyron Corporation and Michael Wellesley-Wesley dated November 19, 1996 - Note 9 (q) Employment Agreement between Chyron Corporation and Edward Grebow dated June 5, 1997 - Note 10 (r) Termination Agreement between Chyron Corporation and Isaac Hersly dated September 17, 1997 - Note 11 (s) Indemnification Agreement between Chyron Corporation and Edward Grebow dated June 5, 1997 - page 60 (1) Incorporated herein in its entirety by reference to the Annual Report for the Fiscal Year Ended June 30, 1991 on Form 10-K dated January 31, 1992. (2)Incorporated herein in its entirety by reference to the report on Form 8-K dated December 27, 1991. (3)Incorporated herein in its entirety by reference to the Annual Report for the fiscal year ended December 31, 1994 on Form 10-K dated March 24, 1995. (4)Incorporated herein in its entirety by reference to the report on Form 8-K dated October 25, 1995. (5)Incorporated herein in its entirety by reference to the report on Form 8-K dated April 26, 1996. (6)Incorporated herein in its entirety by reference to the report on Form 8-K dated March 14, 1996. (7)Incorporated herein in its entirety by reference to the report on Form 8-K/A dated June 21, 1996. (8)Incorporated herein in its entirety by reference to the Annual Report for the fiscal year ended December 31, 1995 on Form 10-K dated March 14,1996. (9) Incorporated herein in its entirety by reference to the Annual Report for the fiscal year ended December 31, 1996 on Form 10-K dated March 20, 1997. (10)Incorporated herein in its entirety by reference to the Form 10-Q for the quarter ended June 30, 1997 dated August 12, 1997 (11) Incorporated herein in its entirety by reference to the Form 10-Q for the quarter ended September 30, 1997 dated November 12, 1997. d) Financial Statement Schedules Schedule II CHYRON CORPORATION AND SUBSIDIARIES VAULATION AND QUALIFYING ACCOUNTS (In thousands) Column A Column B Column C Column D Column E Additions Balance at Changes to Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period Reserves and allowances deducted from asset accounts: YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts $2,850 $533 $259 $3,124 Inventory reserves 12,041 1,887 5,766 8,162 Deferred tax assets valuation allowance 0 0 YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts 3,134 284 2,850 Inventory reserves 12,233 192 12,041 Deferred tax assets valuation allowance 5,400 5,400 0 YEAR ENDED DECEMBER 31, 1995 Allowance for doubtful accounts 2,240 $185 3,134 Inventory reserves 12,515 745 1,435 12,233 Deferred tax assets valuation allowance 14,500 1,153 9,100 5,400 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHYRON CORPORATION /s/ Edward Grebow Edward Grebow President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the date indicated. /s/ Michael Wellesley-Wesley (Michael Wellesley-Wesley) Chairman of the Board of Directors March 16, 1998 /s/ Charles Diker (Charles Diker) Director March 16, 1998 /s/ Edward Grebow (Edward Grebow) President, Chief Executive Officer and Director March 16, 1998 /s/ Douglas Greenberg (Douglas Greenberg) Director March 16, 1998 /s/ Raymond Hartman (Raymond Hartman) Director March 16, 1998 /s/ Alan Hirschfield (Alan Hirschfield) Director March 16, 1998 /s/ Wesley Lang (Wesley Lang) Director March 16, 1998 /s/ Eugene Weber (Eugene Weber) Director March 16, 1998 /s/ Patricia Arundell-Lampe (Patricia Arundell-Lampe) Chief Financial Officer and Treasurer March 16, 1998 EX-27 2
5 12-MOS DEC-31-1997 DEC-31-1997 2,968 0 21,125 0 26,540 57,114 12,373 0 94,080 18,159 0 0 0 326 0 94,080 86,774 0 46,944 39,566 0 0 1,242 (978) (218) 0 0 0 0 (760) (.02) (.02)
EX-1 3 Indemnification Agreement: Chyron Corporation (New York) AGREEMENT, effective as of June 5, 1997 between Chyron Corporation, a New York corporation (the "Company"), and Edward Grebow (the "Indemnitee"). WHEREAS, it is essential to the Company to remain and attract as directors and officers the most capable persons available; and WHEREAS, Indemnitee is a director or officer of the Company; and WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public companies in today's environment; and WHEREAS, the By-Laws of the Company provide: "The Corporation shall indemnify any person to the full extent permitted, and in the manner provided, by the New York Business Corporation Law ["BCL"], as the same now exists or may hereafter be amended" and WHEREAS, this Agreement satisfies the provision of Section 721 of the BCL: and WHEREAS, in recognition of the fact that the Indemnitee continues to serve as a director or officer of the Company in part in reliance on the aforesaid By-Laws and Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued service to the Company in an effective manner, and in part to provide Indemnitee with specific contractual assurance that the protection promised by such By-Laws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of such By-Laws or any change in the composition of the Company's Board of Directors or any acquisition transaction relating to the Company), and due to the potential inadequacy of the Company's directors' and officers' liability insurance coverage, the Company wishes to provide in this Agreement for the indemnification of, and the advancing of expenses to, Indemnitee to the fullest extent (whether partial or complete) permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company's directors' and officers' liability insurance policies; NOW, THEREFORE, in consideration of the premises and of Indemnitee continuing to service the Company directly or, in its request, with another enterprise, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Certain Definitions. (a) Approved Law Firm: shall mean any law firm (i) located in New York City and (ii) rated "av" by Martindale-Hubbel Law Directory. (b) Board of Directors: shall mean the Board of Directors of the Company. (c) Change in Control: shall be deemed to have occurred if (i) any "person" (as such term isused in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than any stockholder (and/or affiliate of such stockholder) on the date of this Agreement or a trustee or other fiduciary holding securities under an employee benefit plan of the Company in substantially the same portions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly of securities of the Company representing 15 percent or more of the totaling voting power represented by the Company's then outstanding Voting Securities (such person being hereinafter referred to as an "Acquiring Person"), or (ii) during any 24-consecutive-month period, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entry) at least 80 percent of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (d) Claim: shall mean any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation, whether conducted by the company or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, suite or proceeding, whether civil, criminal, administrative, investigative or other. (e) Expenses: shall include attorneys' fees and all other costs, expenses and obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, being a witness in or participate in, any Claim relating to any Indemnifiable Event, together with interest, computed at the Company's average cost of funds for short-term borrowings, accrued from the date of incurrence of such expense to the date Indemnitee receives reimbursement therefore. (f) Indemnifiable Event: shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation of any type or kind, domestic or foreign, partnership, joint venture, trust, employee benefit plan or other enterprise, or by reason of anything done or not done by Indemnitee in such capacity. Without limitation of any indemnification provided hereunder, an Indemnitee serving (i) another corporation, partnership, joint venture or trust of which 10 percent or more of the voting power or residual economic interest is held, directly or indirectly, by the Company, or (ii) any employee benefit plan of the Company or an entity referred to in clause (i), in any capacity shall be deemed to be doing so at the request of the Company. (g) Reviewing Party: shall be (i) the Board of Directors acting by quorum consisting of directors who are not parties to the particular Claim with respect to which Indemnitee is seeking indemnification, or (ii) if such a quorum is not obtainable or, even if obtainable, if a quorum of disinterested directors so directs, (A) the Board of Directors upon the opinion in writing of independent legal counsel that indemnification is proper in the circumstances because the applicable standard of conduct set forth in Section 2 of this Agreement and in Section 721 of the BCL has been met by the Indemnitee or (B) the shareholders upon a finding that the Indemnitee has met the applicable standard of conduct referred to in clause (ii)(A) of this definition. (h) Voting Securities: shall mean any securities of the Company which vote generally in the election of the directors. 2. Basic Indemnification Arrangement. If Indemnitee was, is or becomes at any time a party to, or witness or other participant in, or is threatened to be made a party to, or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest extent permitted by law as soon as practicable but in any event no later than 30 days after written demand is presented to the Company, against any and all Expenses, judgements, fines (including excise taxes assessed on an Indemnitee with respect to an employee benefit plan), penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with, or in respect of, such Expenses, judgements, fines, penalties or amounts paid in settlement) of such Claim. If so requested by Indemnitee, the Company shall advance (within two business days of such request) any and all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding anything in this Agreement to the contrary; (i) Indemnitee shall not be entitled to indemnification pursuant to this Agreement if a judgement or other final adjudication adverse to the Indemnitee establishes that Indemnitee's acts were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated, or that Indemnitee personally gained in fact a financial profit or other advantage to which Indemnitee was not legally entitled and (ii) prior to a Change in Control Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee against the Company or any director or officer of the Company unless the Company has jointed in or consented to the initiation of such Claim. 3. Payment. Notwithstanding the provision of Section 2, the obligations of the Company under Section 2 (which shall in no event be deemed to preclude any right to indemnification to which Indemnitee may be entitled under Section 723(a) of the BCL) shall be subject to the condition that the Reviewing Party shall have authorized such indemnification in the specific case by having determined that Indemnitee is permitted to be indemnified under the applicable standard of conduct set forth in Section 2 and applicable law. The Company shall promptly call a meeting of the Board of Directors with respect to a Claim and agrees to use its best efforts to facilitate a prompt determination by the Receiving Party with respect to the Claim. Indemnitee shall be afforded the opportunity to make submissions to the Reviewing Party with respect to the Claim. The obligation of the company to make an Expense Advance pursuant to Section 2 shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under Section 2 and applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees and undertakes to the full extent required by paragraph (a) of Section 725 of the BCL to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation in any court in the State of New York having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. 4. Change in Control. If there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Board of Directors who were directors immediately prior to such Change in Control) then (i) all determinations by the Company pursuant to the first sentence of Section 3 hereof and Section 723(b) of the BCL shall be made pursuant to subparagraph (1) or (2)(A) of such Section 723(b) and (ii) with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and Expense Advances under this Agreement or any other agreement or By- law of the Company now or hereinafter in effect relating to Claims for Indemnifiable Events (including, but not limited to, any option to be rendered pursuant to subparagraph (2)(A) of Section 723(b) of the BCL) the Company (including the Board of Directors) shall seek legal advice from (and only from) special, independent counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld), and who has not otherwise performed services for the Company (or any subsidiary of the Company) or the Acquiring Person (or any affiliate or associate of such Acquiring Person) within the last five years (other than in connection with such matters) or indemnitee. Unless Indemnitee has theretofore selected counsel pursuant to this Section 4 and such counsel has been approved by the Company, any Approved Law Firm shall be deemed to satisfy the requirements set forth above. Such counsel, among otherthings, shall render its written opinion to the Company, the Board of Directors and Indemnitee as to whether and to what extent the Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the special, independent counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising our of or relating to this Agreement or its engagement pursuant hereto. As used in this Section 4, the terms "affiliate" and "associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended and in effect on the date of this Agreement. 5. Indemnification for Additional Expenses. The Company shall indemnify Indemnitee against any and all expenses (including attorneys' fees) and, if requested by Indemnitee, shall (within two business days of such request) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any claim asserted or action brought by Indemnitee for (i) indemnification or advance payment of Expenses by the Company under this Agreement or any other agreement or By-law of the Company now or hereafter in effect relating to Claims for Indemnifiable Events and/or (ii) recovery under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expenses payment or insurance recovery, as the case may be. 6. Partial Indemnity, Etc. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgements, fines, penalties and amounts paid in settlement of a Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereto to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified, to the extent permitted by law, against all Expenses incurred in connection with such Indemnifiable Event. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall, to the extent permitted by law, be on the Company to establish that Indemnitee is not so entitled. 7. Presumption. For purposes of this Agreement, the termination of any claim, action, suite or proceeding, whether civil or criminal, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 8. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the By-laws of the Company, the BCL or otherwise. To the extent that a change in the BCL (whether by statue or judicial decision) permits greater indemnification by agreement than would be afforded currently under the By-laws of the Company and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. 9. Liability Insurance To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any director or officer of the Company. 10. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company or any affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 11. Amendments, Etc. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 12. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 13. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, By-law or otherwise) of the amounts otherwise Indemnifiable hereunder. 14. Specific Performance. The parties recognize that if any provision of this Agreement is violated by the Company, Indemnitee may be without an adequate remedy at law. Accordingly, in the event of any such violation, the Indemnitee shall be entitled, if Indemnitee so elects, to institute proceedings, either at law or in equity, to obtain damages, to enforce specific performance, to enjoin such violation, or to obtain any relief or any combination of the foregoing as Indemnitee may elect to pursue. 15. Binding Effect, Etc. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company), assigns, spouses, heirs, and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer or director of the Company or of any other enterprise at the Company's request. 16. Severability. The provisions of this Agreement shall be severable if any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdication to be invalid, void or other wise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. 17. Governing Law. This Agreement shall be governed by, and be construed and enforced in accordance with, the laws of the State of New York applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. Executed this 5th day of June 1997. CHYRON CORPORATION /s/Daniel I. DeWolf Daniel I. DeWolf Secretary /s/Edward Grebow Edward Grebow -----END PRIVACY-ENHANCED MESSAGE-----